Legal Requirements for Starting a Business in Kenya - Ultimate Guide

March 7th, 2023 by Felix Cheruiyot

You need more than capital and a business plan to start a business in Kenya. Discover the legal requirements for starting a business in Kenya.

Picture this: you've had the perfect business idea for a while now and are finally ready to bring it to life. You've got your business plan prepared, secured funding, and are ready to take the plunge.

But wait, what about the legal requirements for starting a business in Kenya? Have you given a thought to that?

You don’t want to operate illegally and risk having the business shut down when it’s just taking off. This article will prevent that by giving you a complete guide on what the law requires of you when starting a business in Kenya.

Let’s go.

How to start a business in Kenya

To start a business in Kenya, you'll need to:

You'll also need to follow labour,, health and safety, and other laws. There are also intellectual property laws that protect your and other businesses' intangible assets, such as patents, trademarks, and copyrights.

The legal requirements for starting a business in Kenya can seem overwhelming. But worry not! In this guide, we will break down the jargon, simplify the process, and give you the knowledge you need to launch your business confidently.

Business registration in Kenya

As you embark on the exciting journey of starting and running your own business, it's essential to understand what the law requires of you. One of the key requirements is that you must formally register your business, which entails choosing one of several structures.

Types of business structures in Kenya

There are four main business structures you can register under in Kenya:

Each structure has its unique advantages and disadvantages, so take your time to choose the one that best suits your business.

Steps of registering a business in Kenya

Once you have chosen your business structure, you can start the process of registering your business. The registration process involves several steps, including researching and reserving a business name.

The name search process ensures that your business name is unique and not in use by another company. You can conduct this process on the government’s eCitizen website.

After reserving your business name, you must submit your documents to the Registrar of Companies. The documents you must submit are:

Licenses and permits

Depending on the nature of your business, you may need to obtain permits and licenses to operate your business legally. Many of these, like meats and liquor trading licenses, are issued by the city or local authority. Others, like mining and exploration permits, are issued by the central government.

The government has created a portal where you can create an account, apply and pay legal fees and download your license at your convenience.

Business taxation in Kenya

It is important to understand the various tax requirements when starting a business in Kenya. The Kenyan tax system is administered by the Kenya Revenue Authority (KRA) and comprises several taxes that businesses must pay.

Types of business taxes in Kenya

The main types of taxes businesses must pay in Kenya are:

Corporate tax

Corporate tax is a tax on the profit a business makes. It is levied at a rate of 30% for resident companies and 37.5% for non-resident companies.

Calculating corporate tax is a complex process involving multiple factors, including the company's structure, activities, and profits.

For example, companies may benefit from a lower rate of corporate tax if they can show that their profits have been reinvested in the business. Companies may also claim deductions for employee benefits and training.

Value Added Tax (VAT)

VAT is a tax on the supply of goods and services. Levied at a rate of 16%, this tax is collected from the suppliers of such goods and services. The tax is charged wherever value is added to a product or service, with those that collect it acting as an agent of th government.

Pay As You Earn (PAYE)

PAYE is a tax levied on employment income. It is deducted from the employee's salary at the source. The employer is responsible for deducting PAYE from the employee's salary each month and paying the government.

The amount of Pay As You Earn tax depends on the employee's salary level. The PAYE system allows the government to tax employees promptly and efficiently. It is a relatively straightforward process, as the employer handles all of the calculations and payments.

Excise duty

Excise duty is a special tax charged on importing and manufacturing certain consumable goods. It is an indirect tax on all goods that are consumed in the country, regardless of whether they are imported or manufactured locally.

In Kenya, excise duty is imposed on items such as cigarettes, alcohol, petroleum products, beverages, and pharmaceuticals. The government determines the rate of excise duty charged on these goods, which may vary from item to item.

Importance of registering for tax purposes

After registering for taxes, all businesses must file their taxes within the given deadlines. Missing the deadline for filing taxes can lead to heavy penalties, fines, and possible legal action.

Having the right accounting systems to ensure accurate and timely tax filing is also essential. A good accounting system enables your business to keep track of your income and expenses, which is essential for filing taxes.

Tax returns for VAT and PAYE must be filed monthly, while corporate tax must be filed annually. Failing to file tax returns or filing late can result in penalties and interest charges.

You may face fines and interest charges if you don’t pay tax on time and in full. You could also face criminal charges if fraud or tax evasion is cited.

Tax incentives for businesses in Kenya

The Kenyan government offers several tax incentives to encourage investment and growth. These incentives include:

Investment deductions

In Kenya, certain businesses are eligible for investment deductions. These deductions are designed as incentives to attract investment into the country’s economy.

These incentives can reduce the cost of capital or increase expenditure on things such as research and development. This helps to spur growth, create jobs, and increase overall economic productivity.

Export processing zone tax incentives

Kenya's export processing zones (EPZs) are an effort to increase foreign direct investment, expand exports, and create jobs. Incentives offered by EPZs include a 10-year income tax holiday, duty-free import and export of raw materials, machinery, and equipment, and duty-free re-exportation of intermediate and finished products.

EPZ incentives allow businesses to reduce their costs, making them more competitive in the global market. EPZs also offer investors an easier process for setting up businesses due to a special one-stop shop for processing permits and licenses.

Special economic zone tax incentives

SEZs (special economic zones) offer various tax incentives, such as reduced corporate taxes and customs duties that make it easier for businesses to establish their operations in Kenya.

SEZ tax incentives help to attract investments, create jobs and promote economic growth while helping to create an environment that encourages innovation and competitiveness.

Employment and labour laws in Kenya

Kenya has a well-established legal framework that governs employment and labour practices in the country. These laws set out the minimum standards for employers' and employees' rights and obligations.

Entrepreneurs need to understand these laws when starting a business in Kenya to ensure compliance and avoid legal disputes.

Minimum wage requirements.

The government sets the minimum wage in Kenya which varies depending on the industry and type of work. Currently, the minimum wage for employees in Nairobi is KES 15,120 per month.

The minimum wage ensures that employees in Kenya have enough money to cover basic needs and can maintain a decent standard of living. It sets a baseline for what employers must pay their employees, providing them with some assurance of payment for their work.

You can choose various ways of paying your employees, which can be via credit card, cash, bank deposits, or mobile money transfers.

IntaSend simplifies the process of paying wages, suppliers, and vendors. It allows businesses to make bulk and scheduled payments.

Working hours and overtime regulations

The maximum working hours in Kenya are set at 52 hours per week. This means that employees should work a maximum of 8 hours per day, 6 days per week.

Any work beyond the maximum working hours is considered overtime and should be compensated at 1.5 times the normal hourly rate. The law also ensures employees get a rest period of at least one day every week, with at least 24 consecutive hours off work.

The workweek should also be regulated to ensure employees work a maximum of 6 consecutive days. Employers must ensure that employees have sufficient rest periods during the day, with at least one break of at least 30 minutes.

Health and safety regulations

Employers must ensure their employees' health and safety while at work. This includes providing a safe working environment, protective equipment, and training on handling hazardous materials.

Employers must also report any workplace accidents or injuries to the relevant authorities. They also have an obligation to monitor employees for any signs of mental or physical fatigue and ensure regular breaks throughout the workday.

Legal requirements for hiring and terminating employees

When hiring employees in Kenya, employers must provide a written employment contract that sets out the terms and conditions of employment. This includes details on the job description, working hours, salary, and benefits.

Termination of employment should also be done per the law and the employment contract terms. Employers must provide notice to the employee before termination and can only terminate for justifiable reasons.

The employer must provide a valid reason for terminating employment and provide payment in lieu of notice where necessary. If the employee disputes the termination, they can take legal action and seek remedies such as reinstatement or compensation.

Understand your legal obligations to start your business on the right foot

Compliance with legal requirements is crucial for entrepreneurs starting a business in Kenya. Understanding and adhering to business registration, taxation, employment and labour, and intellectual property laws helps ensure the success of the business and avoid legal disputes.

Seeking professional advice and guidance can provide valuable information on the legal framework and requirements necessary for starting and operating a business in Kenya. By complying with regulations and the law, entrepreneurs can build a strong foundation for their businesses and contribute to the growth and development of the Kenyan economy.

Cover Photo by Scott Graham on Unsplash

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